Survey of Transparency and Inclusiveness Practices in the Palestinian Public Budget Management

Transcription

1 Survey of Transparency and Inclusiveness Practices in the Palestinian Public Budget Management July 2018

2 The Coalition for Accountability and Integrity (AMAN) expresses its profound thanks to Dr. Nasser Abdul Karim for preparing this report. AMAN would also like to thank Dr. Azmi Shuaibi, Consultant to AMAN s Board of Directors for Anti-Corruption Affairs, for reviewing and editing the report. All rights reserved The Coalition for Accountability and Integrity (AMAN) When quoting, please cite the report as follows: The Coalition for Accountability and Integrity (AMAN). (2018). Survey of Transparency and Inclusiveness Practices in the Palestinian Public Budget Management. Ramallah, Palestine. AMAN has made efforts to verify information in this report. Following publication, AMAN does not assume any responsibility for using this information for purposes beyond the context and goals of the report.

3 Introduction The importance of the public budget derives from the fact that it reflects an inclusive expression of the political, economic and social programme of the State s functions. The public budget is a key tool of public financial management, which has direct and indirect reflections and consequences on all living conditions of citizens. Because they are the main contributors to the public budget revenues and impacted by budgeting policies, citizens have the right to access, participate in, and monitor the implementation of, the public budget preparation. In all stages of the budgeting process, transparency and access to fiscal information are essential prerequisites to enable public participation and impact the three phases of the budget process. Both requirements are also key to promoting government accountability for informed public financial management. The International Budget Partnership (IBP) adopts eight key budget documents, which must be published to ensure public budget transparency. The IBP started to implement the OBS in many countries. The 2017 survey evaluated 115 countries across six continents. The Open Budget Survey (OBS) is informed by a comparative assessment of the degree of transparency and accountability practised by governments in their budget cycles. The OBS questionnaire examines the budget transparency system and assesses the three main pillars of the budget accountability system: public availability of budget information; opportunities for the public to participate in the budget process; and the role and effectiveness of formal oversight institutions. The OBS comprises five sections: (1) Public Availability of Key Budget Documents (Pre-Budget Statement; Executive s Budget Proposal and supporting documents for the Executive s Budget Proposal; Enacted Budget; Citizens Budget; In-Year Reports; Mid-Year Review; Year-End Report; and Audit Report); (2) Comprehensiveness of the Executive s Budget Proposal; (3) comprehensiveness of other key budget documents; (4) Role and Effectiveness of Oversight Institutions in the Budget Process; and (5) Public Engagement in the Budget Process. The OBS questionnaire consists of 142 questions designed to assess the budget transparency system, distributed to four sections (sections 2 through 5). The questions assess the public availability and comprehensiveness of the key budget documents. The majority of the survey questions assess what occurs in practice, rather than what is required by law.

4 This report assesses the practices of transparency, partnership and accountability for the Palestinian public budget management. The assessment is in line with the standards and indicators set by the methodology of the Open Budget Survey (OBS) of the International Budget Partnership (IBP). The report presents recommendations that contribute to improving and developing each of the four stages of the public budget management process (budget formulation, enactment, execution, and audit). Unless otherwise indicated, the fiscal year of the public budget is Methodology for preparation of the report This survey is premised on the Open Budget Survey (OBS) of the International Budget Partnership (IBP). The methodology for preparing this assessment report involves a review of the OBS standards and indicators. These international benchmarks are compared to the Palestinian budgeting experience in practice, including the four stages of the public budget management process. To clarify the intended meaning, an OBS standard, indicator or question is quoted verbatim from the Guide to the Open Budget Questionnaire, together with relevant guidelines. The review and comparison are based on the key budget documents of the Palestinian National Authority (PNA), posted on the website of the Palestinian Ministry of Finance and Planning (MoFP). The process is also informed by relevant literature published by the Civil Society Team for Enhancing Public Budget Transparency, international organisations, and local research centres. It should be noted that some of the 142 questions of the OBS questionnaire do not apply to the Palestinian context. OBS indicators are modelled on the best practices to ensure budget transparency. Stages of Palestinian budget preparation and enactment process According to the Law on the Regulation of the Public Budget No. 7 of 1998, the public budget preparation and enactment process is as follows: 1. The MoFP develops a report on the fiscal position on 1 May. 2. The Council of Ministers compiles fiscal policies of the next fiscal year in June. 3. The MoFP prepares the economic framework of the public budget in June. 4. The MoFP issues the budget circular for all responsibility centres on 1 July. The budget circular includes MoFP instructions on the budget process and a distribution of budget ceilings to line ministries/government bodies. These ceilings are predefined by the Council of Ministers for line ministries/government bodies (in August). Line ministries and government bodies prepare relevant budget proposals in line with their established ceilings.

5 5. The MoFP examines and compiles budget proposals of all line ministries and government bodies into the PNA budget proposal. The latter is presented to the Council of Ministers on 1 October. 6. The Council of Ministers examines the budget proposal within two weeks and presents to the Palestinian Legislative Council (PLC) on 1 November. 7. The PLC Budget Committee examines and deliberates the budget proposal over a period of one month. Then, the PLC convenes in an ad hoc session to approve and enact the budget proposal in the form of a law. 8. The Presidents endorses the Public Budget Law. Key documents of the Palestinian public budget process 1. Budget Circular; 2. Budget Proposal Summary; 3. Citizens Budget; 4. Enacted Budget; 5. In-Year (Monthly and Quarterly) Reports; 6. Mid-Year Review of the Fiscal Year; 7. Year-End Report; and 8. Final Accounts Audit Report. Assessment of the Palestinian public budget process in light of the guidelines of the OBS methodology: International good practice in the public budget management process Section 1: Public Availability of Key Budget Documents This section examines transparency of the budget system, with a particular focus on the key budget documents. According to international good practice, these documents must be made publicly available. This section is premised on a set of indicators, as follows:

6 Indicator: Public availability and timely publication of key budget documents In line with this indicator, key budget documents include the Pre-Budget Statement; Executive s Budget Proposal and supporting documents for the Executive s Budget Proposal; Enacted Budget; Citizens Budget; In-Year Reports; Mid-Year Review; Year-End Report; and 1 Audit Report. Pre-Budget Statement The PBS presents the executive s economic and fiscal policy plans for the forthcoming budget year and encourages debate on the budget in advance of the presentation of the more detailed Executive s Budget Proposal. The Pre-Budget Statement reflects the culmination of the strategic planning phase of the budget process, in which the executive broadly aligns its policy goals with the resources available under the budget s fiscal framework the total amount of expenditure, revenue, and debt for the upcoming budget year. This process establishes the parameters of the budget proposal before detailed programme funding decisions are made. By laying out the budget s broad parameters, the statement can help create appropriate expectations for the Executive s Budget Proposal. The Pre-Budget Statement can also be associated with a medium-term expenditure framework, which seeks to link policy, planning, and budgeting over a multi-year period. Best practice recommends that the Pre-Budget Statement include: macroeconomic forecasts upon which the budget will be based; major revenue and expenditure policies and priorities that will guide the development of detailed estimates for the upcoming budget; and multi-year revenue and expenditure projections. The OBS methodology requires that for a PBS to be considered publicly available, the Pre-Budget Statement must be made available to the public one month before the Executive s Budget Proposal is submitted to the legislature for consideration. In the Palestinian context, the Budget Circular corresponds to the Pre-Budget Statement. It is produced by the MoFP and Council of Ministers and distributed for internal purposes. However, the Budget Circular is not made available to the public and civil society organisations. 1 Publicly available budget documents are defined as those documents that are published on the website of the public authority issuing the document within the time frame specified in the OBS methodology and that all citizens are able to obtain free of charge.

7 Is the PBS made available to the public? While the Citizens Budget was initially conceived as a simplified version of the Executive s Budget Proposal or the Enacted Budget, good practice is now evolving and suggests that a citizens version of key budget documents should be produced during each of the four phases of the budget cycle. This would serve to inform citizens of the state of public financial management throughout the entire budget cycle. While it is recognized that it may be unreasonable to expect that a Citizens Budget is produced for each and every one of those key documents, it seems acceptable to expect that according to good practice, the executive releases a Citizens Budget for each of the four stages of the budget process to allow citizens to be aware of what is happening, in terms of public financial management, throughout the entire budget cycle. Accordingly, international good practice of the public budget process requires that a citizens version of each budget document be published for each of the four stages of the budget process (budget formulation, enactment, execution, and audit). Executive s Budget Proposal (EBP) and its Supporting Documents The Executive s Budget Proposal is the government s major statement on fiscal issues for the budget year that is about to begin. This document includes detailed revenue, expenditure, and debt estimates; macroeconomic assumptions, historical and multi-year budget data; and public policy information. The EBP is one of the most important policy documents that a country issues each year, for it is through the budget that governments translate many of their key policy goals into action. The nature of the Executive s Budget Proposal can vary from country to country; sometimes it is a single document, and sometimes it is a collection of multiple documents. It is important that the Executive s Budget Proposal is transparent because its proposals determine revenues (how much citizens pay in taxes), expenditures (how government resources are distributed among citizens), and debt (how much of the cost of government is borne by current or future generations). To allow for an informed public and legislative discussion on the budget, best practice calls for the executive to provide a full explanation of its taxation, spending, and borrowing plans well in advance of its enactment. Article 21 of the 1998 Law on the Regulation of the Public Budget provides that the draft law on the public budget will comprise, inter alia:

8 1. A table showing in brief the re-estimation of revenues and expenditures up to the last two years in advance of the budget year according to the chapters and parts in line with the approved sorting. 2. A table showing in brief the financial and cash position for the account of the public treasury. 3. A table showing the credits and debits or local or foreign short or long term loans of the National Authority as well as the proposed plans for its collection or settlement. 4. A table showing the contributions and investments of the National Authority in the local and none local entities and companies. 5. A brief description of the National Authority s programmes, plans and objects for the coming fiscal year within the statement of the budget which is submitted by the Minister. When is the EBP submitted to the legislature for consideration? According to Article 3(a) of the 1998 Law on the Regulation of the Public Budget, the public budget proposal must be submitted to the PLC for consideration, approval and enactment at the beginning of November. In Palestine, the fiscal year starts on 1 January and ends on 31 December of every year. The Public Budget Law must be enacted on 1 January The MoFP presented the 2018 Executive s Budget Proposal to ministers at the Council of Ministers meeting on 6 February The budget proposal was also presented to some representatives of parliamentary blocs in the West Bank-based PLC in February Later, the government presented the budget proposal to some businesspeople from the private sector as well as to representatives of the donor community. The Public Budget Law of the current fiscal year was enacted on 4 March Civil society organisations, particularly the Civil Society Team for Enhancing Public Budget Transparency, were not given a sufficient opportunity to access and review the public budget proposal. The Team includes the majority of specialised civil society organisations in the budget in relation to the sectors for which they are responsible. According to the National Policy Agenda , the government is committed to strengthening accountability and openness to citizens and facilitating public access to information. The government stresses that it provides access for, and engages, the civil society in the planning and budgeting processes. If it happens, public engagement in the budget process is formal, partial and selective, only targeting some civil society organisations.

9 Also, contrary to provisions of the 1998 Law on the Regulation of the Public Budget, the 2017 public budget proposal was not submitted to the PLC in early November 2016, but in January The budget proposal was presented in a meeting with a number of representatives of the private sector and civil society. However, the presentation did not maintain an inclusive approach to the budget process. Promoting transparency of the public budget requires active participation by all civil society actors. The government must be effectively committed to the principle of inclusiveness in planning and budgeting process, particularly in the absence of the PLC role. Most often, the government does not comply with the statutory deadlines set for the public budget submission. According to the Law on the Regulation of the Public Budget No. 7 of 1998, the government must submit the budget proposal to the PLC for approval in early November of the year to which it corresponds; that is, two months in advance of the beginning of the fiscal year in Palestine on 1 January of every year. The law allows the government to delay budget approval until 31 March. This means that administrative units (line ministries and government bodies) will work for three months i.e. a quarter of the fiscal year following the same of the pattern of the foregoing budget. Article 4 of the Law on the Regulation of the Public Budget No. 7 of 1998 provides that [i]f it is not possible to pass the public budget draft law prior to the beginning of the new fiscal year, the Ministry shall have the authority to collect the revenues according to the mechanisms, conditions and rates provided for in the legislation in force and the expenditure shall continue through monthly appropriations at the rate of 1/12 (one out of twelve) for each month of the past fiscal year s budget to a maximum period of three months. However, the question remains: Why is not the government up to date with the approval of the budget? What does it take a relatively long time (almost a quarter of the fiscal year)? Is there a rationale or economic, social or political feasibility for such a delay? When is the EBP submitted to the legislature for consideration? Is there a citizens version of the EBP? The OBS methodology requires that for an EBP to be considered publicly available, it must be made available to the public while the legislature is still considering it and before the legislature approves (enacts) it. In Palestine, a public budget proposal is not made available to the public and civil society organisations.

10 Enacted Budget The Enacted Budget is a document (a budget or appropriation) that is typically approved by the legislature (Note that the PLC is currently inactive), after debating the executive s (Council of Ministers ) proposed budget. The Enacted Budget is the starting point for monitoring the execution phase of the budget in terms of revenues, expenditures, programmes, and policies. When was the Enacted Budget approved (enacted) by the legislature? The OBS methodology requires that for an Enacted Budget to be considered publicly available, it must be made available to the public three months after the budget is approved by the legislature. If the EB is not released to the public at least three months after the budget is approved by the legislature, the Enacted Budget is not released to the public. In Palestine, the Enacted Budget is published on the MoFP website within the acceptable time frame. However, publication is still late because the Enacted Budget is not approved within the statutory deadline; i.e. 1 January of the year to which the Enacted Budget corresponds.

11 Is there a citizens version of the Enacted Budget? Citizens Budget A Citizens Budget is a nontechnical presentation of a budget document. It is designed to reach and be understood by as large a segment of the population as possible. It is typically written in accessible language and incorporates visual elements to help non-specialist readers understand the main information concerning revenues and expenditures in the public budget. The Citizens Budget document must be issued within the time frame specified by the OBS methodology, ensuring that all citizens are able to obtain it free of charge. Shortly before the 2011 public budget was enacted, the Civil Society Team for Enhancing Public Budget Transparency submitted a proposal to the Minister of Finance to adopt and issue the Citizens Budget. Then, the Minister agreed and issued instructions to the Directorate General of the Public Budget to cooperate the Civil Society Team for Enhancing Public Budget Transparency. For the first time in Palestine, the Citizens Budget was released in 2011 and It was further developed into the Citizens Guide in However, the Citizens Budget was not published in 2014 and The Civil Society Team for Enhancing Public Budget Transparency took the initiative and prepared the Citizens Budget in A citizens version of the 2017 public budget was only published at the time the budget proposal was submitted to the PLC in January Under pressure from the Civil Society Team for Enhancing Public Budget Transparency, the government (or MoFP) published the Citizens Budget together with the enacted 2018 budget on the Ministry s website as an online version. What is the public availability status of the Citizens Budget? The Citizens Budget is made available as an online version only on the MoFP website. A hard copy is not published nor distributed to citizens and civil society organisations, however. This means that citizens without internet access cannot visit the MoFP website and review the Citizens Budget. This is the only citizens version produced and made available to the public. Citizens versions of in-year reports are not published. These should make clear the cold numbers presented in monthly and quarterly reports which are posted on the MoFP website, ensuring they are user-friendly and easily understood by the non-specialist audience. Also, citizens versions of mid-year reviews are not released, let alone making them publicly available. Citizens versions of year-end and audit reports are further lacking.

12 In-Year Reports In-Year Reports are issued during the year as the budget is being executed. They are intended to show the executive s progress in implementing the budget. They typically show actual expenditure by administrative unit (ministries, departments, or agencies), to ensure that they are held accountable for their expenditure. In some countries, the information is consolidated into one report, which is typically issued by the ministries of finance. The OBS methodology requires that for In-Year Reports to be considered publicly available, In-Year Reports must be made available to the public no later than three months after the reporting period ends. The Palestinian executive (MoFP) is credited for publishing monthly and quarterly in-year reports on the MoFP website. However, these reports are criticised for presenting cold numbers without any attached explanations or clarifications by the Ministry, ensuring they are user-friendly and easily understandable by the non-specialist audience. Mid-Year Review The Mid-Year Review provides a detailed explanation of the state of the budget six months into the budget year. In order to ensure that programmes are being implemented effectively and to identify any emerging problems, the government should conduct a comprehensive mid-year review of the budget s implementation about six months into the budget year. This review should assess the state of the economy relative to the initial macroeconomic forecast and update the economic projections for the remainder of the year. The Mid-Year Review should provide updated estimates of expenditure, revenue, and debt, reflecting the impact of actual experience to date and revised projections for the full fiscal year. Revised estimates in the Mid-Year Review should also reflect both economic and technical changes as well as new policy proposals, including the reallocation of funds between administrative units, with a comprehensive explanation of any estimate adjustments. Issues such as cost increases due to inflation or any unexpected events should be identified and appropriate counter measures should be proposed. The public release of a Mid-Year Review is intended to promote accountability and sound management. In this context, the government can be said to have implemented any of the following options: Produced but made available online to the public too late (published after the acceptable time frame) Produced but made available only in hard copy or soft copy (not available online) Produced for internal purposes/use only Not produced at all

13 The OBS methodology requires that for an Mid-Year Review to be considered publicly available, it must be made available to the public no later than three months after the reporting period ends (i.e., three months after the midpoint of the fiscal year). The Mid-Year Review must be published on the website of the public authority issuing the document. It must be made available on the Internet and free of charge to be considered publicly available. In the Palestinian context, mid-year reviews are neither issued nor made publicly available. Only clod numbers are issued and presented in aggregate monthly and quarterly reports on the MoFP website. Year-End Report This is a key accountability document produced and published by the executive (or MoFP). It reports extensively on the government s performance on implementing the budget during the entire fiscal year. The report ought to cover all of the major items included in the budget, explaining differences between the original budget estimates and the actual outcomes for expenditure, revenue, debt, and the macroeconomic assumptions. These reports should also review nonfinancial performance information. They can also include a financial statement. The OBS methodology requires that for an Year-End Report to be considered publicly available, it must be made available to the public no later than one year after the fiscal year to which it corresponds. If the Year-End Report is not released to the public within one year after the end of the fiscal year to which it corresponds, the Year-End Report is considered as if it has not released to the public, or is released more than 12 months after the end of the budget year. Annual reports published on the MoFP website covers the fiscal years However, these fall short of the standards of the mid-year reports mentioned above. The MoFP reports are nothing but cold numbers, which represented the government s fiscal statistics. They are only available in Arabic for some years, namely, 2011, 2015, and 2017, for the fiscal year ending in 31 December of the year to which the reports correspond. Mid-year reports of 2013, 2014 and 2016 are published in English only. Although it is published on the MoFP website, the yearend report of 2012 is unintelligible. Contrary to the OBS methodology, all year-end reports are not made publicly available in any manner, either in hard copy or online.

14 Audit Report At the end of each fiscal year, a country s Supreme Audit Institution (SAI) performs an annual audit of the final accounts. The Audit Report is a document produced by the SAI as a result of its audit activities, and evaluates the legality and regularity of the government s financial management and accounting in relation to compliance or performance. The OBS methodology requires that for an Audit Report to be considered publicly available, it must be made available to the public no later than 18 months after the end of the fiscal year to which it corresponds. According to OECD best practices, the SAI should complete these audits within six months of the end of the budget year for administrative units. When is the AR made available to the public? According to the OBS methodology, the Audit Report can be made publicly available in line with one of the following options: Six months or less after the end of the budget year; 12 months or less, but more than six months, after the end of the budget year; More than 12 months, but within 18 months, after the end of the budget year; or Does not release to the public, or is released more than 18 months after the end of the budget year Only one audit report on the 2009 final accounts was published by the Palestinian State Audit and Administrative Control Bureau (SAACB). This is posted on the MoFP website. Let alone the fact that it is the last one published on the Ministry website, the report is not available to the public because it is unintelligible. Official sources confirm that publication of audit reports for the years was delayed. Finally, the SAACB published the 2017 report. However, this report is not publicly available At the time of preparation of the present survey.

15 General Questions The following questions ask about government practices and laws that relate to issues of transparency and citizens access to budget and non-budget information. a. A limited number of websites that publish public budget data Are there one or more websites or web portals for disseminating government fiscal information? The only website is hosted by the Palestinian MoFP. Covering a number of previous years, fiscal data posted on the MoFP website include abstract and clod numbers, which do not provide any citizens versions. The MoFP website does not post pre-budget statements, citizens budgets, or in-year reports of previous years. Revenue and expenditure data for the current fiscal year can be downloaded as a file. The MoFP website does not include infographics/visualisations to simplify data access and analysis. The 2018 citizens budget includes some statistical visualisations, but these are rather simple. On these websites/portals, can revenue and expenditure data for the current fiscal year be downloaded as a consolidated file (or set of files)? On these websites/portals, can consolidated revenue and expenditure data be downloaded for multiple years in consistent formats? On these websites/portals, are infographics/visualizations or other similar tools used to simplify data access and analysis? Through websites/portals on the MoFP webpage, revenue and expenditure data can be downloaded for the current fiscal year as a consolidated file or set of files. On these websites/portals, consolidated revenue and expenditure data can be downloaded for multiple years in consistent formats. However, these data is just abstracts of the public budget; i.e. data is not adequately detailed. Infographics/visualizations or other similar tools are not used to simplify data access and analysis on these websites/portals. b. Lack of additional laws on access to information, government transparency and public engagement in the public budget preparation process. There are there additional laws regulating: (1) access to information; (2) government transparency; or (3) citizens participation. Some laws have already been enacted, including the Law on Combatting Corruption No. 1 of After the Law by Decree Concerning the Amendment of the Law on Illicit Gains was approved and promulgated by the President of the Palestinian National Authority on 20 June 2010, the Commission for Illicit Gains was transformed into the Anti-Corruption Commission. The Law on the State Audit and Administrative Control Bureau was enacted in However, there are no laws on the right of access to information, government budget transparency, and public engagement in the budget preparation process. An example is the Law on the Right of Access to Information.

16 Section 2: Comprehensiveness of the Executive s Budget Proposal This section assesses the content of the Executive s Budget Proposal. The Executive s Budget Proposal typically receives more attention from the legislature, the media, and the public than any other budget document that the executive regularly releases. This heightened level of attention makes it essential that the Executive s Budget Proposal and any supporting budget documentation are made widely available and provide clear and comprehensive information. The Executive s Budget Proposal is one of the most important policy documents that a country issues each year, for it is through the budget that governments translate many of their key policy goals into action. It is important that the Executive s Budget Proposal is transparent because its proposals determine revenues (how much citizens pay in taxes), expenditures (how government resources are distributed among citizens), and debt (how much of the cost of government is borne by current or future generations). To allow for an informed public and legislative discussion on the budget, best practice calls for the executive to provide a full explanation of its taxation, spending, and borrowing plans well in advance of its enactment. Expenditure classification in the Executive s Budget Proposal Does the Executive s Budget Proposal present expenditures for the budget year by administrative units, functional classification, or economic classification? Does the Executive s Budget Proposal present expenditures for individual programmes for the budget year? Does the Executive s Budget Proposal present expenditure estimates for a multi-year period (at least two-years beyond the budget year)? There are three different types of expenditure classification: (1) Administrative unit who spends the money; (2) functional classification for what purpose is the money spent; e.g. education and health; and (3) economic classification what is the money spent on. The latter covers current expenditure (spending on wages and salaries) or capital expenditure (e.g. spending on capital and development projects or transfer expenditure, such as social subsidies). Unlike classification by administrative unit, which tends to be unique to each country, functional and economic classifications for government budgeting have been developed and standardised by international institutions. Cross-country comparisons are facilitated by adherence to these international classification standards. Classification by administrative unit allows to hold administrative units to account for expenditure and how allocated money is used.

17 Based on the classification system used implement the Palestinian central government budget and relevant reports, the MoFP prepared the 2018 budget in reference of administrative and economic classifications, using Government Finance Statistics (GFS). This indicates that the planning and budgeting process in Palestine has improved. It is noted that the 2018 budget present expenditure by administrative classification on the level of responsibility centres. Data is presented on responsibility centre level in the form of an economic classification: wages and salaries, use of goods and services (operating expenditure), social contributions, and capital expenditure. The public budget also presents expenditure by functional classification (i.e. by government functions or purpose of the programmes, sector or objective for which money will be used: education, health, agriculture, security, etc.). If the Executive s Budget Proposal or any supporting budget documentation presents expenditures for the budget year by economic classification, the economic classification must be compatible with international standards; i.e. with the International Monetary Fund s (IMF) 2001 Government Finance Statistics (GFS). Also, administrative and functional classification must be consistent with international standards. It is noted, however, that the economic classification of the Palestinian budget, both proposed and enacted, falls short of the level of international economic classification in terms of comprehensiveness and detailed content. For example, expenditures and revenues are shown as aggregate numbers, without a breakdown into their respective subcategories. On the other hand, 2018 monthly and quarterly reports (January-May) are in line with the GFS and provide comprehensive and detailed information in terms of expenditures and revenues. This positive point should be noted for the Palestinian public budget, indicating commitment to international standards set by the IMF-issued OBS. To assess the public budget in terms of returns (benefits) and cost, the public budget should be a programme budget, where the performance of each individual programme is assessed. In this context, the Palestinian government is credited for adopting the programme budget. Expenditures are presented by programmes of each line ministry, government body or public institution. A programme can be any level of detail below an administrative unit, such as line ministry and government body). For example, the Ministry of Health s budget can be broken down into multiple programmes, including primary health care, secondary health care, mental health, and administration and governance. However, monthly, quarterly and annual reports published on the MoFP website only present clod numbers, which are not aligned with relevant objectives and programmes (e.g. the latest May report on the 2018 budget). In addition, the Executive s Budget Proposal does not present expenditure estimates for a multi-year period (at least two-years beyond the budget year) by administrative unit, economic classification or functional classification. According to the OBS methodology, the Executive s Budget Proposal or any supporting budget documentation must present expenditure estimates for a multi-year period (at least two-years beyond the budget year) by any of the three expenditure classifications (by administrative, economic, or functional classification).

18 Revenue breakdown in the Executive s Budget Proposal The goal is to assesses the degree to which the revenue are disaggregated in the budget by category (e.g. tax and non-tax revenues); assess the degree to which the individual sources of tax revenue are disaggregated in the budget (e.g. taxes on personal and business income and taxes on goods and services, such as sales or value-added taxes); and assess the degree to which the individual sources of non-tax revenue are disaggregated in the budget (e.g. grants from international institutions and foreign governments to funds raised through the sale of government-provided goods and services). The Executive s Budget Proposal or any supporting budget documentation must present of individual sources of tax and non-tax revenues. Revenues generally are separated into two major categories: tax and non-tax revenues. Taxes are compulsory transfers from juridical and natural persons to the State s treasury and result from government exercising its sovereign power. The largest sources of tax revenue in some (developed) countries are taxes on personal and business income (i.e. direct taxes on income) and indirect taxes on goods and services, such as sales or value added taxes. A close look at the Law by Decree on the Palestinian Public Budget of 2018 shows that Article 1 provides estimates of budget revenues and expenditures for the fiscal year ending on 31 December However, this article only shows aggregate numbers of revenues and expenditures. Also, the summary of the 2018 baseline budget and previous budgets only presents aggregate numbers of revenues and expenditures. In other words, tax revenues are not disaggregated by their individual sources. In the best case scenario, the 2018 fiscal position of the PNA shows tax and non-tax revenues as aggregate numbers without a breakdown into individual sources. However, individual sources of direct and indirect tax revenues, as well as individual sources of non-tax revenues, are presented in monthly and quarterly reports only (e.g. January-May 2018 reports). On the other hand, the Executive s Budget Proposal and Enacted Budget do not show tax and non-tax revenues disaggregated by their individual sources. Contrary to the OBS methodology, it is noted that property income and sales of government-produced goods and services are not available in the 2018 Budget Law by Decree, published on the MoFP website. These revenues do not appear in monthly and quarterly reports. Government held assets are presented in a financial document, titled The Annual Questionnaire of Government Finance Statistics (Statistical Tables) of Although it is the only document that shows public sector expenditures and revenues, this document includes undecipherable clod numbers, including of property income and public sector sales, assets and liabilities. However, this questionnaire is an exceptional case; it has not recurred in other fiscal years.

19 According to the OBS methodology, the Executive s Budget Proposal or any supporting budget documentation do not present direct and indirect tax revenue estimates for a multi-year period (at least two-years beyond the budget year). Estimates for all revenue sources for a multi-year period are not shown as well. This may be attributed to a special situation. Namely, a state of political and economic uncertainty and instability prevails in Palestine due to the Israeli occupation and practices that ran counter the Palestinian economy growth and development. This situation does not prevent such estimates for a multi-year period, but for a single fiscal year. As successive Israeli governments have done, it suffices that Israel withhold clearance revenues, immediately leading to an immediate crisis in the Palestinian public finance system. Public debt estimates According to the OBS methodology, the Executive s Budget Proposal or any supporting budget documentation must present three estimates related to government borrowing and debt: the amount of net new borrowing required during the budget year; the total debt outstanding at the end of the budget year; and interest payments on the debt for the budget year. It must also present information related to the composition of the total debt outstanding at the end of the budget year. The core information must include interest rates on the public debt instruments, maturity profile of the debt, and whether it is domestic or external debt. The maturity profile indicates the final payment date of the loan, at which point the principal (and all remaining interest) is due to be paid. Government borrowing typically includes a mix of short-term and long-term debt. These factors related to the composition of the debt give an indication of whether the cost of servicing the accumulated debt is affordable by the State (or economy). In the budget supplement, the Palestinian Budget Law of the Fiscal Year 2018 only includes total estimates of the domestic and external debt for the period : projected payments and interest rates in the four currencies: NIS, JD, USD, and Euro. However, these estimates are presented without a financial analysis.

20 Public debt is the accumulated amount of money that the government borrows. The government can borrow from its citizens and banks and businesses within the country (domestic debt) or from creditors outside the country (external debt). External debt is typically owed to private commercial banks, other governments, or international financial institutions such as the World Bank and the IMF. Net new borrowing is the additional amount of new borrowing that is required for the budget year to finance expenditures in the budget that exceed available revenues. Net new borrowing adds to the accumulated debt. It is distinct from gross borrowing, which also includes borrowing needed to repay existing debt that matured during the budget year. With a very low interest rate of 1 percent, the majority of external public debt comes from international financing institutions or non-profit foreign governments. These include loans from the World Bank, European Investment Bank, and International Fund for Agricultural Development. Domestic debt is provided for the years , showing monthly interest payments, core payments, and balance (at the end of every month) of all domestic loans in the three currencies: NIS, JD, and USD. The Palestinian Executive s Budget Proposal lists payments and interest rates of either domestic or external debt as unintelligible cold numbers. Interest rates on domestic debt are not available. Interest amounts are provided in absolute numbers. Also, interest rates do not appear as either flat or variable. Domestic debt (borrowing) sources and total debt outstanding at the end of the budget year are not shown. There is not analysis of the risk associated with the debt, particularly loans from private sources, such as commercial banks. Macroeconomic forecasts upon which the budget projections are based and the sensitivity analysis The Executive s Budget Proposal or any supporting budget documentation must present information on the macroeconomic forecast that focuses on the budget s revenue and expenditure estimates, asking whether core information related to the economic assumptions is presented. These core components include a discussion of the economic outlook as well as estimates of the following: nominal GDP level; real GDP growth; and interest rates.

21 While the core macroeconomic information should be a standard or typical feature of the Executive s Budget Proposal, the importance of some types of macroeconomic assumptions may vary from country to country. For example, the budget estimates of some countries are particularly affected by changes in the price of oil and other commodities. Beyond these core elements, some governments also provide additional information related to the economic outlook, including for instance: short and long-term interest rates; rate of employment and unemployment; GDP deflator; price of oil and other commodities; current account; exchange rate; and composition of GDP growth. The 2018 Budget Law shows the core elements of the macroeconomic forecasts, such as real GDP growth, inflation rate, unemployment rate, investment and saving indicators, financial sector, external sector, and public finance. However, the Budget Law does not include outlooks for additional core indicators, such as components of real GDP growth, employment rates, interest rates, prices of some strategic goods with impact on revenue and expenditure items, such as the price of oil and some imported food supplies. A sensitivity analysis shows the effect on the budget (revenues and expenditures) as a result of potential changes in some macroeconomic assumptions; for instance, what would happen to revenue collections if GDP growth were slower than what is assumed in the budget proposal? Or what would happen to expenditure if inflation were higher than estimated? Or how will expenditures be affected by an increase in the price of oil or some main imported food supplies? The Executive s Budget Proposal or supporting documentation must present all of the core information related to a sensitivity analysis. In the Palestinian context, the 2018 Budget Law presents estimates for the development of core expenditure and revenue items based on historical real data of expenditures and revenues in the previous year (i.e. 2017) for the current budget (2018 budget). A sensitivity analysis shows impact on the budget as a result of potential changes in some macroeconomic assumptions or forecasts. The Palestinian budget presents narrative estimates and volume of the anticipated impact and reflections of new expenditure and revenue policies on the budget of the year to which it corresponds (i.e budget). The budget projects an economic growth of 2.73 percent in the West Bank, but excluding the Gaza Strip. The growth results in a projected increase of 7 percent in new revenues in 2018 compared to Also in comparison to 2017, the budget also projects a 7.4 percent rise in domestic tax revenues thanks to the tobacco sector reform. It also expects an increase of 5 percent in clearance revenues due to government continued effort in this area. Additionally, the budget projects a 50 percent rise in income from company tax after company tax brackets have been modified.

22 The 2018 budget anticipates all expenditure items will increase, with the exception of net lending which is projected to drop in 2018 by 6.2 percent (from NIS 960 million in 2017 to NIS 900 million in 2018). Under other line items, however, the budget indicates that net lending will decrease by 20 percent. 2 The budget projects a 14.1 percent decrease in current account deficit, but does not present projections in terms of the impact of plummeting revenue items on the budget; e.g. decrease in tax collections due to tax evasion or because of clearance revenues withheld by the Israeli government. In addition, the government does not present three scenarios (optimistic, pessimistic, most likely) for macroeconomic projections and relevant effect on expenditures and revenues. The soundness of estimates is directly related to the degree to which they have been updated to reflect actual expenditures and revenues used in the estimation. Typically, the year prior to the budget year (BY-1), also known as the current year, has ended, so the data of BY-1 does not reflect actual expenditures and revenues. Thus, the OECD recommends that data covering at least two years before the budget year (along with two years of projections beyond the budget year) are provided in order to assess fully the trends in the budget. The Executive s Budget Proposal of the PNA (or MoFP) presents expenditures of the previous year, along with more than one year before the current budget year, in aggregate numbers by economic classification of expenditures. As published on the MoFP website, these are not presented as per the programme budget. The Executive s Budget Proposal also presents revenues by category (e.g. tax and nontax revenues) for BY-1. These are listed as aggregate numbers, not by individual sources (e.g. by VAT, customs, income tax, etc.). These revenues may be presented for internal purposes within the MoFP, albeit they are not published on the Ministry s website. In addition, the Executive s Budget Proposal or any supporting budget documentation must present: Expenditure estimates for BY-1 by all three expenditure classifications (by administrative, economic, and functional classification) Individual programmes accounting for all expenditures for BY-1. Expenditure estimates for BY-1 updated from the original enacted levels. The Executive s Budget Proposal or any supporting budget documentation must also present expenditures for individual programmes for more than one year prior to the budget year (that is, BY-2 and prior years). (A country must meet the good practice of having the figures for BY-2 reflect actual outcomes.) 2 This is explained by the fact the government collects direct amounts from local government units. These are itemised as net lending, but deducted from revenues; hence, the real result of net lending does not appear.

23 Individual sources of revenue for the year preceding the budget year (BY-1), revenue by category (such as tax and non-tax) for the year preceding the budget year (BY-1), and an update of the original estimates of revenue for the year prior to the budget year (BY-1) to reflect actual revenue collections. In most cases, the most recent year for which budget data on actual outcomes are available will be BY-2, as BY-1 is generally not yet finished when the budget proposal is drafted. So a government that has updated all its expenditure data for BY-2 to reflect what actually occurred, as opposed to estimating the outcome for that year, shows good public financial management practice. The core info rmation must include the total debt outstanding at the end of BY-1; the amount of net new borrowing required during BY-1; interest payments on the debt; interest rates on the debt instruments; maturity profile of the debt; and whether it is domestic or external debt. The most recent year for which all revenues reflect actual outcomes. Options can be as follows; 1. Two years prior to the budget year (BY-2). 2. Three years prior to the budget year (BY-3). 3. No actual data for all revenues are presented in the budget or supporting budget documentation. Usually, the Palestinian budget presents actual expenditure and revenue data for two years prior to the budget year (BY-2). For example, the 2018 budget presents actual expenditure and revenue data for 2016 and 2017 as well as variation rates between both. However, these are presented in aggregate, undetailed numbers by individual sources. Also, the budget does not present expenditure and revenue estimates for two years after the budget year. Information on government borrowing and debt, including its composition, for the year preceding the budget year (BY-1). The most recent year for which the debt figures reflect actual outcomes. Options include: 1. Two years prior to the budget year (BY-2). 2. Three years prior to the budget year (BY-3). 3. No actual data for government debt are presented in the budget or supporting budget documentation